Perils of doing business in a secret state

Rio Tinto 'spies' fell victim to a Chinese regime where the rules are changing - and unknowable

• Tania Branigan in Beijing
• guardian.co.uk, Wednesday 22 July 2009 18.14 BST
• Article history

When Chinese police detained four Rio Tinto employees – including an Australian national – for allegedly stealing state secrets, a chill ran down the spines of many foreign investors.

Given its timing shortly after Rio aborted plans to take a £12bn investment from Chinalco, the state-owned metals producer, many initially suspected it was retribution for that debacle. Australia was quick to suggest it could affect the international business community's perceptions of the world's third largest economy.

Today the latest round of a war of words between the two governments over the spying allegations deepened as it emerged that China has told the Australian government that it has "sufficient evidence" to support the accusations.

He Yafei, China's vice-minister of foreign affairs, said: "I stressed that we have sufficient evidence showing that the individuals involved obtained China's state secrets using illegal means. The case has entered the judicial process and I requested the Australian side to respect China's judicial sovereignty."

Rio has denied the claims that its employees have been involved in any kind of spying or bribery in China.

Integrity

Canberra said that it would "take some time" to resolve the crisis, which has seen Rio's top iron ore executive in China, Australian Stern Hu, held for 18 days along with three colleagues. Stephen Smith, the Australian foreign minister, said he still hoped to meet his Chinese counterpart to discuss the matter.

China is Australia's biggest trade partner, with trade worth $53bn (£32.3bn) last year. Last week Simon Crean, its trade minister, warned that the case was "important as a signal to all people seeking to do business in China" and called for the matter to be handled quickly.

With the case still under investigation, no one can be sure of the precise details of the allegations; still less of whether they have foundation. Rio Tinto has stressed that it believes its staff "acted at all times with integrity and in accordance with Rio Tinto's strict and publicly stated code of ethical behaviour" and denied claims that they bribed steel companies.

But most now believe the issue is in effect an inquiry into the operations of a complicated and often shady steel industry rather than any espionage or national security matters. The problem is that in China, the distinction is not so clear. The case centres on negotiations between Chinese steelmakers and iron ore producers, led by Rio Tinto, and the information used in those talks. Because so many Chinese companies are partly government-backed, and because steel is a strategic industry, it has become far more than a purely commercial matter.

"This case illustrates some of the uncertainty of getting involved in business in China," said John Frankenstein, assistant professor of economics at the City University of New York. "A Chinese lawyer once told me 'basically, the state can legitimately intervene in any deal at any time under any pretext'."

"There are a lot of multinationals who came to China and have a fact-finding, commercial information arm. For those people it's certainly worrying," added Tom Miller, of the Beijing-based economic consultancy Dragonomics.

"If you are in the kind of business where you think there might be an overlap between commercial information and state secrets, you would be concerned. The problem is that Chinese law on this is very, very oblique and frankly no one knows what a state secret is."

The worst fears of foreign investors appear to have been mitigated by the emerging details of the Rio case.

"I don't think it's as alarming as it looked on day one," said one business adviser who asked not to be identified; several people were reluctant to speak on the record, or had been instructed not to do so by their companies, in a sign of the case's sensitivity.

"There is obviously a degree of political motivation; it's impossible to say it's pure coincidence."

But he pointed out that the inquiry had expanded with the investigation of executives from steel firms, suggesting that the authorities were not simply targeting Rio Tinto and that they were concerned about the "notoriously corrupt" industry and its possible skewing of development. "Using legal means to intimidate or pressurise companies in business negotiations at lower levels is not at all surprising; it happens quite a lot. But to happen on that sort of stage would be unusual," he added.

The case is so sensitive that it was reported that president Hu Jintao personally approved the decision to press ahead. But Steve Dickinson, a partner at the law firm Harris & Moure in Qingdao, believes the issues it raises are not new.

Executed

"The old notion used to be that foreigners got a free pass – the worst that would happen was that you would be told to go home. That is not the rule now," he said. "People who conduct industrial espionage and bribe people and obtain information illegally should not set foot in China.

"One guy said to me 'everyone does that in China'. But people also go to jail and get executed for doing this in China. People do it and think 'see, nothing happened'. The only time things happen in China is when things go sideways."

Many complain that the market for illicit information has been created by China's failure to establish legally compliant information agencies. "Government and enterprises should realise that by [providing] publicly available information, they can to a large extent satisfy the demand for commercial intelligence ... and reduce the space available for corruption and espionage," the Beijing-based economic consultancy Anbound said.

Dickinson acknowledges many clients chafe at obeying laws that they can see competitors flouting. "Foreigners have pressure to get information through improper means … [But] If you can't do things any other way – go home. It's not worth being arrested for," he added.

Whether companies take his advice remains to be seen. "I doubt this will put them off coming. Most of the world economy is still in the doldrums; China is one of the bright spots," said Miller, speaking days after new figures showed that GDP growth rose to an unexpectedly high 7.9% in the second quarter.

Experts also play down suggestions that an increasingly mighty China is brushing aside the firms it used to woo. "There's anxiety that China is not interested in foreign investment any more," pointed out Professor Li Wei, of the Cheung Kong Graduate School of Business in Beijing and the University of Virginia.

"I would discount that. It doesn't care much about financial resources foreign companies can bring, but access to foreign markets remains important. I don't expect major changes."

Germany accuses China of industrial espionage

• Cyber sabotage and phone hacking rife, agent says
• Several Chinese workers caught stealing secrets

• Kate Connolly in Berlin
• guardian.co.uk, Wednesday 22 July 2009 19.57 BST
• Article history

Germany is under attack from an increasing number of state-backed Chinese spying operations that are costing the German economy tens of billions of euros a year, a leading intelligence agent said.

Walter Opfermann, an espionage protection expert in the office for counter-intelligence for the state of Baden-Württemberg, said that China was using an array of "polished methods" from old-fashioned spies to phone-tapping, and increasingly the internet, to steal industrial secrets.

He said methods had become "extremely sophisticated" to the extent that China, which employs a million intelligence agents, was now capable of "sabotaging whole chunks of infrastructure" such as Germany's power grid. "This poses a danger not just for Germany but for critical infrastructure worldwide," he said.

Russia, he said, was also "top of the list" of states using internet spying techniques to garner vital German know-how which "helps save billions on their own economic research and development". He said while Russia only had "hundreds of thousands of agents", compared to China's million, it had "years more experience".

Opfermann estimated that German companies were losing around €50bn (£43bn) and 30,000 jobs to industrial espionage every year.

"China wants to be the world's leading economic power by 2020," Opfermann said. "For that they need a speedy and intensive transfer of high-level technological information which is available in developed industrial lands, if you can get your hands on it".

The areas most under attack include car manufacturing, renewable energies, chemistry, communication, optics, x-ray technology, machinery, materials research and armaments. Information being gathered was not just related to research and development but also management techniques and marketing strategies.

Opfermann said internet espionage was the biggest growth field, citing the "thick fog of Trojan email attacks" taking place against thousands of firms on a regular basis and the methods employed to cover up where the emails had come from.

But he said "old-fashioned" methods were also rife, such as phone-tapping, stealing laptops during business trips or Chinese companies who regularly sent spies to infiltrate companies.

"I cannot name names but we've dealt with several cases of Chinese citizens on work experience in German companies, who stole highly sensitive information from them," he said.

In one case, the police raided the house of a Chinese woman suspected of stealing company secrets from a German business where she was working, and discovered 170 CDs containing highly sensitive product details.

In a separate case a highly qualified Chinese mechanical engineer employed by a company in the Lake Constance region was discovered to have passed on information for a machine it was developing to the company's Chinese competitor, who constructed an exact copy.

"As is often the case the man disappeared and went back to China – so often the attacker is way ahead of the game and it's also hard to find out who they've been working for."

Opfermann said although the problem was "huge and growing", it was not being discussed, "because companies don't want to admit their weaknesses and lose customers and they don't want to ruin business opportunities with China. As a result we're only seeing the tip of the iceberg."

Two years ago the consultancy firm Corporate Trust estimated that around 20% of German companies – mainly small and middle-sized businesses – had been the victims of industrial espionage.The findings chime with fears across the industrial world about the threat of cyber crime and the corresponding increase in efforts being put in place to fight it.

In Britain last month the GCHQ, the government's electronic spy centre, which estimates that the UK loses GBP 1bn a year to e-fraud, set up operations to deal with the growing threats. The Pentagon also announced it is to create a new "cyber command" and in May President Obama said he would establish a White House role to oversee cyber defence, saying the nation's digital networks had to be recognised as a "strategic national asset".